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| Apartment buildings lined up in Seoul. The Ministry of Strategy and Finance and the Financial Services Commission is considering easing the loan-to-value ratio for mortgages to 70 percent from the current 60 percent maximum to boost the real estate market. Under eased LTV rules, a home buyer can borrow up to 350 million won ($349,000) from a bank to buy a 500 million won apartment. / Yonhap |
By Choi Kyong-ae
Korea will ease regulations next week to help home buyers borrow more, as an effort to boost the economy, government officials said Tuesday.
The move comes after the Bank of Korea revised down the country's economic growth outlook for the year. The central bank lowered the prediction for gross domestic product growth to 3.8 percent from the previous 4.0 percent last week due to sluggish domestic demand.
Deputy Prime Minister and Finance Minister Nominee Choi Kyung-hwan "is planning to announce a package of stimulus measures regarding loan-to-value (LTV) and debt-to-income (DTI) rules," an official from the Ministry of Strategy and Finance said by telephone. He asked not to be named.
Since his nomination as finance minister last month, Choi has said an easing of the LTV and DTI-related regulations are badly needed to revive the flagging economy, among other reasons. Choi is scheduled to receive a certificate of appointment for the finance minister position from President Park Geun-hye today.
Still, the Financial Services Commission (FSC) and industry officials said softened regulations could end up resulting in heavier household debts while achieving lower-than-expected results as a catalyst for the economy.
To keep household debts from increasing further, an FSC spokesman said Tuesday, "Eased LTV rules need be limited to those who buy a house for residential reasons, not for investment reasons."
The Ministry of Strategy and Finance is seeking to raise the LTV ratio to 70 percent for most of home trade in the country. Currently, the ratio is 50 percent for transactions in Seoul and the metropolitan area and 60 percent for the rest of the country.
For example, a potential buyer of a home valued at 300 million won ($290,000) will be able to borrow up to 210 million won from a bank regardless of his residential area.
On top of eased LTV ratios, lower interest rates are expected to result in higher home transactions. The central bank Governor Lee Ju-yeol hinted last week a possible rate cut as early as in August due to "increasing downside risks."
For July, the policy bank kept the benchmark interest rate steady at 2.5 percent for a 14th straight month.
Household debts for the first quarter ending March 31 rose 6.4 percent to 1,024.8 trillion won from 962.9 trillion won a year earlier. Of them, home mortgage loans soared to 428 billion won at the end of May from 392 trillion won in 2011, showed data from the central bank.
As they have to put aside more loan loss provisions in case of a sharp increase in non-performing loans, banks appear to be uncomfortable with the ministry's aggressive stimulus plans.
LTV ratio is the proportion of a loan to the total value of a property. DTI ratio is the proportion of borrowings from the overall value of salaries.
Meanwhile, the ministry seeks to ease the DTI ratio to 60 percent and the FSC wants the ratio to be 50 percent. The ministry and the financial regulator confirmed they have yet to find a common ground before an announcement next week.
The DTI ratio runs at 50 percent in Seoul and at 60 percent in Incheon and other cities in the Gyeonggi Province. There are no regulations for other provincial cities, according to the FSC.
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